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Uncharted waters - High Court declines liquidators’ fishing expedition for director’s personal information

04 Jul 2017 Insolvency and restructuring

The High Court recently declined a novel application by liquidators against a company director for an order under section 266 of the Companies Act 1993 (Act) that the director provide the liquidators with financial information about his personal affairs.

The Finnigan v Ellis case [1] is the first of its kind in New Zealand to consider whether liquidators are entitled to such information. In a judgment rich with metaphors, Associate Judge Sargisson in her opening remarks said:[2]

"Fishing expeditions are a popular pastime for many people. The fisher does not know, of course, what he or she might reel in - trout, salmon, or nothing at all. Nonetheless, the line is thrown out in the hope, and the expectation, that something will bite. And then there is the alluring possibility that today, or maybe tomorrow, the hook will find that 'perfect catch'.

The liquidators in this case… are said to be 'going on a fishing expedition'. In this legal context, the idiom has rather less cheerful connotations…. In this case, the liquidators want to fish in the lake of Mr Ellis' personal accounts. The 'perfect catch' would be evidence that Mr Ellis has the assets to satisfy any judgment made against him."


Background

Mr Ellis was a director of a company in liquidation. The liquidators and a creditor of the company had issued a proceeding against Mr Ellis and two other co-directors alleging various breaches of directors’ duties.[3] The liquidators examined all three directors under oath. The two other directors agreed to provide the liquidators with information about their personal financial affairs. Mr Ellis refused.[4] As it turns out, he was right not to agree to the liquidators’ request ‘hook, line and sinker.’

The liquidators sought production of the information under section 266(2)(b) of the Act, which provides that "the court may, on the application of a liquidator, order a person to whom section 261 of the Act applies to: produce any books, records or documents relating to the business, accounts, or affairs of the company in that person’s possession…”
 
The Court’s decision

The liquidators’ application failed because they ‘cast their net’ too wide in terms of the information they sought from Mr Ellis. Associate Judge Sargisson described the application as ‘comprehensive and invasive’.[5] She considered the scope of the application too extensive to justify overriding Mr Ellis’ expectation of privacy:[6]

"…the expressed purpose of the liquidators' application is to assess whether Mr Ellis is worth powder and shot. It surely suffices, then, for Mr Ellis to establish that he has enough assets to meet the potential judgment liability. But as it is, Mr Ellis is asked to lay out details of what might conceivably be personal assets dramatically in excess of the amount that judgment is sought…To order such extensive disclosure might be to use a sledge hammer to crack a nut, and ride roughshod over reasonable expectations that personal financial affairs are private and should normally remain so."

The Court held that the liquidators had not discharged the onus that there was a proper case to exercise the Court’s discretion. The question of whether the Court has jurisdiction to make such orders was left unresolved. Associate Judge Sargisson observed that: “the question is more complicated than simply: are liquidators allowed at all to fish in the pool of a potential defendant’s affairs?”[7] Her Honour went on to say:[8]

“One such question is this: Where are the boundary-lines separating where the liquidators can or cannot fish?...

Another such question is what justification the liquidators are required to put forward before the court will allow them to ‘throw out their line’. In this vein, it is important to stress that in exercising their powers under ss 261 or 266, liquidators are not like children playing 'go fish' picking up cards from the pool with having any clue what they might be. … The interesting question becomes at what point, or on what degree of justification, the liquidators may go beyond the limits of their powers in s 261, and to ask the Court's assistance to further intrude on the rights of a potential defendant. Must liquidators point to 'something fishy' about the way a person has structured their financial affairs that gives rise a suspicion they are attempting to shield their assets? How substantial is the basis for such suspicion required to be?"


Our comments

The question of whether liquidators are entitled to financial information about potential or actual defendants remains unanswered. While it may be possible that a court could grant a more ‘scaled back’ application, the courts will nevertheless be circumspect where personal information is sought from potential defendants. If such an application is to succeed, there must be good reasons to require personal information, beyond just the defendant’s ability to satisfy a judgment. The courts will not allow liquidators to simply ‘trawl’ for personal information.

For more information about the case, please contact us.  

[1] Finnigan v Ellis [2017] NZHC 1397. Please click here for a copy of the case.
[2] At paras [1]–[2].
[3] At para [3].
[4] Para [9].
[5] Paras [15] to [19].
[6] At para [24].
[7] At para [46].
[8] At paras [47] to [48].

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© 2017 KENSINGTON SWAN The contents of this newsletter are for general information purposes only, and should not be acted upon without specific advice. Kensington Swan does not accept any liability other than to its clients, and then only in relation to specific requests for advice.

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